The President, the Economy, and the Lag
I love the people who read this blog and send us e-mails. (Well, not all of them — but only because I don’t know all of them yet, I am sure.)
Consider Paul Kimelman. He lives in Alamo, Calif., and is C.T.O. of the Texas-based microcontroller company Luminary Micro. In the past, he has sent us e-mails that were better than our typical blog posts, so we put them up on the site as guest posts. The subjects have ranged from the Wii shortage to the correlation (or lack thereof) between school grades and career success.
Here’s his latest. There are echoes in it of an earlier post I wrote about how much the president really matters. If you are not the wonky-quant type, do not let the wonky-quantish first sentence deter you from reading on.
I was showing a friend how to set up a trend comparison of regression analysis vs. nonlinear regression for some work he is doing on consumer-confidence metrics and economic cycles (the reason for the comparison is to deal with the fact that confidence measures are not tracked linearly in time or in terms of actual metrics, and the apparent switch to cheaper imported goods during downward cycles creates non-linearities).
Anyway, this got me thinking about a question that I think is touched on a lot on the Freakonomics blog: namely, the question of how much a sitting president affects the economy (can take credit or blame for it), and how much lag there is.
The reason this got me thinking is that we normally assume a high lag factor in the economy, especially since it takes two quarters to measure a recession as well as the exit from recession.
But if we all believe that one of the major factors in G.D.P. growth or recession is consumer confidence (purchasing of goods and services fuels all levels of the economy, from manufacturing to transport to retail and so on), then one would have to assume that a new president could have a much more dramatic impact on the economy than we normally consider; I do not mean due to actions (not enough time), but rather expectation of actions to come.
The “morning in America” or “change” mantra of a candidate can inspire consumers to feel better about themselves and their own situations, and so [they] spend more. Oppositely, candidates running on negative platforms — “everything is a problem to be solved,” “it’s a dangerous world” — may have a depressing effect on the confidence of consumers.
Other related factors affect consumer confidence, often in quite strong ways. I do not mean the obvious things, but the indirect ones:
1) We know that many consumers react to the state of the stock market(s), even if they have no involvement in them. This is likely due to the assumption that stock markets are a direct metric for the health of the economy (and the average consumer keeping or losing his/her job).
2) Discomfort with the perceived state of the government likely has some impact. For example, the screwed-up election of 2000 certainly seemed to have a very negative impact on consumers and their confidence in the government, and so may have had a quick impact on spending.
3) It is currently unclear how much the 24/7 “news media” amplifies confidence trends. That is, the question is whether the hysterical need to state something catchy and be first about it has a stronger impact on the psyche of the average consumer than just the normal awareness of things.
For example, if people hear about plant closings in a particular industry, most will not fear for their own jobs. But if the talking heads ask menacingly “Is this the sign of a failing economy and the loss of many more jobs in all sectors?!” — do people start worrying and hold back on those purchases?
We know that sitting presidents have tried to overcome recessions or recessions-coming by telling America that all is O.K., by telling people to go out and spend money, as well as by throwing money at them (e.g. stimulus checks, tax breaks, etc.).
We can debate how well any of them have worked, but it seems, at best, we are looking at correlation of time (if you say “things are getting better” enough, [your statements] will align with the upward cycle, and so [your strategy] will appear to have worked). But the question is whether some presidents have been more inspiring by nature and so have gotten people spending when elected and kept people spending while in office. Reagan and Clinton in recent times certainly come to mind. Neither came across as “wonkish,” but more “insightful” and driven by an inner confidence. Ford, Carter, and George H.W. Bush never had that inner confidence. George W. Bush had it, but over time it was exposed as “false confidence” or “ignorance,” which is not the same (and not inspiring in my view).
I wonder what your readers think.